On 1st January 2020 a new regulation from the International Maritime Organization (IMO), a specialized UN agency, will require all shipping companies to switch to cleaner fuels with a max. sulphur content of 0.5%.
Hamburg Süd fully supports this regulation. It will deliver a significant benefit to the environment as well as to human health by reducing sulphur pollution from shipping by more than 80%.
Hamburg Süd will primarily comply by using low sulphur fuels. We have also decided to invest in a relatively limited number of scrubbers; the use of LNG is only relevant for new built ships. It is important to note that these alternative options also come at significant cost. Overall, we expect that more than 90% of all vessels in the shipping industry will use low sulphur fuels to ensure compliance when the regulation commences in January 2020.
In light of the above there is significant uncertainty in regards to fuel prices in 2020. However, we expect that fuel prices will increase significantly in light of the stricter emissions criteria and thus the need for greater refining capacity and more sophisticated refining techniques for marine fuels. While we will start purchasing compliant fuel (i.e. 0.5% sulphur) during Q4 2019 the exact cost of this new fuel type has not yet been published by global fuel oil producers.
We will provide our customers with more information as it becomes available and will seek to publish the new Bunker Cost Adjustment Factor including this fuel type as far in advance as possible to allow you to plan accordingly.
The shipping industry cannot absorb this increased cost from the new IMO regulation: we have to pass it on to our customers. It is only fair, however, that we provide our customers with predictability around the extra costs to also enable you to make the necessary adjustments to freight budgets and further to the transportation cost component in your product prices.
Therefore, we have designed a Bunker Adjustment Factor (BAF) which reflects actual costs, and where the tariff is predictable.